adminTimo Bollerhey
As African affluence grows, there is a growing need for financial services and better social security. Pension coverage may be on the rise in some countries, but with much of this state-driven, opportunities are on the rise for the private market. Africa, seemingly a long-forsaken part of the world, is now rising to new and largely unexpected heights. After decades of war, poverty and humanitarian crisis that created a form of deep-rooted Afro-pessimism, the view on Africa is rapidly changing.
For example, The Economist branded Africa the “hopeless continent” just a decade ago, only to recently dedicate a full cover-story to “Africa Rising,” a briefing on the continent’s hopeful economies.
It seems hardly a week goes by without one of the renowned consulting companies publishing a new study on Africa’s promising future and the growth opportunities the continent has to offer. Many observers describe this re-emerged interest as the “new scramble for Africa,” while often critically mentioning Chinese involvement on the continent.
It’s time to take a closer look at the fundamental reasons behind this dramatic change of perspective and its implications for the financial services and pension industry. Or, to use the official 2010 football World Cup slogan: Ke nako – “It’s time for Africa.”
Although statistics can mislead, a simple look at the relative growth numbers of the African economies is impressive. Nine of the 15 countries in the world with the highest rate of five-year economic growth are located on the continent. According to the International Monetary Fund (IMF), sub-Saharan Africa in total is expected to expand by 5.4% this year, while the global figure will be around 3.5%.
To be realistic, these extraordinary relative figures have to be put in perspective. They are due to the low development levels that many African countries are only now beginning to emerge from. Nevertheless, it does show a clear trend that will ultimately trigger a series of economic developments that will change the face of the continent.
Already, the consumer spending per capita in many African countries has surpassed that of India and China, and the total consumer spending on the continent of $1 trillion is comparable to countries such as Russia and Brazil. As more Africans emerge from poverty and join the middle class (the size of the African middle class more than doubled between 1980 and 2010), total consumer spending is set to grow further and to double by 2020 according to a recent study by consultants Bain & Company (Growing with Africa’s consumers, 2012).
Foreign direct investments increased fivefold between 2000 and 2010, with 97% being invested outside of South Africa. Exports also nearly tripled in the same period, with East Asia emerging as the leading export destination. Political stability and good governance, both terms one does not usually associate with Africa, have gained ground and now provide stable and sound investment environments in a rising number of African countries. In 2011 alone, 28 national-level elections took place in 20 countries across Africa.
AN UNEVEN PLAYING FIELD
Many more promising and exciting improvements could be singled out, but there are still challenges ahead for Africa. For one, economic growth is uneven on the continent and only a few powerful countries such as South Africa, Nigeria and Egypt dominate the economic landscape.
At first glance, one would assume that most of these developments are triggered by and based on the commodity boom of recent years as well as increasing external demand and involvement of foreign investors such as China. Interestingly, these factors only play a supporting role, while other indigenous growth-drivers have built the foundations of the latest African success story.
Roland Berger Strategy Consultants identified seven key industries that play a crucial and significant role in driving a sustainable growth momentum in Africa: financial services, consumer goods and retail, telecommunications, public services, transportation, manufacturing, and energy (Inside Africa, 2012).
In the last decade, financial services in Africa have taken off at a remarkable pace, with Africa’s banks logging average growth rates of 42% for their balance sheets and up to 54% for their net income. Yet, more than 400 million people still live on the continent without access to banking or other financial services.
The establishment of any form of social security systems, including insurance and retirement plans, is still in its infancy stages in many of the African countries. It is estimated that only 5-10% of the continent’s population is covered by any pension plan.
CHANGING DEMOGRAPHICS
Like the economic imbalances between the different countries in Africa, pension coverage is also highly differentiated. Northern African countries such as Egypt, Libya and Tunisia have an 80% pension coverage of the labor force. By comparison, in Niger only 3% of the labor force is covered. According to the International Labour Organization, old-age, disability and survivors’ pensions are available in just 39 African nations.
Considering these economic growth rates and the fact that every day more Africans are moving from a subsistence lifestyle in the informal economy to formal employment, it is not difficult to imagine the retirement industry could experience significant expansion in the future.
While Africa will still have a favorable demographic curve in the decades ahead, the United Nations estimates that the number of people aged 60 or older in Africa will rise from 55 million in 2010 to 213 million by 2050. Even in South Africa, the country with the most advanced financial services industry on the continent, pension funds grew at a compound annual rate of 14.3% over the last 10 years.
Africa’s largest pension fund, the Government Employees Pension Fund (GEPF), is located in South Africa and has more than 1.2 million active members and assets worth approximately $85 billion. Total assets under management by this and other South African pension funds has risen to more than $277 billion in 2011.
The government-owned Public Investment Corporation (PIC), managing assets on behalf of the GEPF and other funds, is one of the most prominent investors on the Johannesburg Stock Exchange and increasingly steps in to fill significant gaps in local and regional infrastructure funding.
UNLIMITED OPPORTUNITIES
Looking north of South Africa, growth rates are even more impressive. Based on pension reforms that took place in Ghana, Nigeria, Gabon, Kenya and other countries, the development of pension systems has gained outstanding momentum.
In Nigeria, which introduced the latest pension reform act in 2004, assets managed by pension funds grew from $3 billion in 2008 to $14 billion by 2011. Similarly high growth rates can also be observed in Tanzania, where the pension industry is growing by 25% per year.
In most countries the establishment of retirement systems is driven by obligatory state pension schemes, administrated by national social security funds. The private sector is only now waking up to the potential of this largely untapped market.
International as well as South African players are increasingly exploring how to develop the continent’s opportunities. Meanwhile, Europe and other developed regions need to wake up to the African growth story. As the ancient traveler and explorer Leo Africanus once said, Ex Africa semper aliquis novi! – “Something new always comes from Africa!”
The writer, Timo Bollerhey, is director of business development Africa at Allianz Global Investors. Prior to this, he was head of financial institutions and sovereigns Africa & Middle East at Raiffeisen Bank International.
Online Reporter